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    Hong Kong Securities Regulatory Commission: UBS was fined 375 million Hong Kong dollars for the absence of sponsors and revoked licenses for one year

    2019-03-14 16:37:51

    Financial sector website 

    The Hong Kong Securities and Futures Commission (SFC) condemned UBS AG and UBS Securities Hong Kong Limited (UBS Securities Hong Kong) (collectively referred to as UBS) and imposed a fine of HK$375 million because UBS was in three listing applications. One of the co-sponsors did not fulfill their due responsibilities. The three listing applications were China Forest Holdings Limited (China Forest), Tianhe Chemical Group Co., Ltd. (Tianhe) and another company (the other listing application).

    The SFC also partially suspended the license for UBS Securities Hong Kong to provide advice on institutional financing for a period of one year, so that UBS Securities Hong Kong may not act as a sponsor for any listing of securities on the Stock Exchange of Hong Kong Limited (SEHK).

    The SFC also suspended the license of Haotian (male) for a period of two years from March 14, 2019 to March 13, 2021, because he was responsible for supervising the implementation of the listing application for China Forest. Failure to perform its supervisory duties as the principal of the sponsor.

    The SFC also took action today against other joint sponsors involved in the listing of China Forest and TRW.

    Missing sponsors in listing applications for Chinese forests

    The SFC survey found that UBS did not make reasonable due diligence on multiple core areas of China's forest business.

    (i) Failure to verify the existence of forest assets in Chinese forests

    According to China Forest's 2009 Prospectus, the company and its subsidiaries (China Forest Group) are artificial forest operators whose main businesses are forest management and sustainable development, as well as logging and sales of logs, and in Yunnan Province, China. Sichuan has about 171,780 hectares of forest.

    UBS became one of the co-sponsors of the China Forest Listing Application at or about May/June 2009. However, after becoming a sponsor, UBS did not conduct any field visits to the forests of China Forest Group. Although UBS claimed to be the joint bookrunner in 2008, it conducted field visits to the forests of China Forest Group in Sichuan Province and Yunnan Province, but failed to provide any records or identify the exact location of the investigation.

    UBS claims that other professionals, including lawyers and forest experts, have participated in some field trips. However, none of them received instructions to verify the existence of the forest disclosed by China Forest Group in the prospectus.

    In addition, although China Forest Group acquired 150,000 hectares of forest in Yunnan Province (accounting for more than 90% of its forest assets) in 2008, there is no evidence that UBS has inspected China Forest Group's forests in Yunnan Province or commissioned other institutions. An assessment of the impact of the Richter 6.0 earthquake that occurred on July 9, 2009 in Yunnan Province on these forest assets.

    (ii) did not verify the forest rights of China Forest Group

    According to the prospectus, the legal rights of China Forest Group to its forests are certified by the relevant forest ownership certificates. Although UBS claims to have reviewed the original of the certificate, it did not identify multiple situations that appeared to be unusual and should be considered for further enquiries.

    UBS also claims that its domestic lawyers have verified and inspected the relevant certificates. However, this matter is not reflected in the relevant legal opinions. In fact, the relevant legal advice states that its construction is based on the assumption that the documents provided by Chinese forests are true and accurate.

    (iii) Failure to verify compliance with relevant laws and regulations in China's forests

    UBS relies on a confirmation from the Chinese Forest that it is allegedly issued by the relevant Forestry Bureau to confirm that China's forest business and logging activities are in line with the relevant Chinese forest laws. However, there is no evidence that UBS has verified whether the relevant confirmation has been issued by the relevant Forestry Bureau and whether the information recorded therein is accurate.

    (iv) Insufficient due diligence on the coverage of forest assets of China Forest Group

    The forest assets of China Forest Group are the key to its business operations, so it is important to purchase sufficient insurance for these assets. UBS relies on the insurance documents provided by China Forest as evidence of the insurance that has been purchased, and does not independently verify the authenticity of the insurance documents.

    Although UBS claims that its trading team members and mainland Chinese lawyers have checked the insurance documents, they have not identified many of the issues that should have been further inquired (for example, the location of certain forests contained in the insurance documents and the disclosures in the prospectus) Does not match).

    (v) Insufficient due diligence on Chinese forest clients

    In the last 18 months of the Track Record Period, more than 70% of China Forest's customers are located in Yunnan Province. UBS had planned to conduct face-to-face interviews with customers from China's forests in Yunnan Province, but later decided to postpone face-to-face interviews due to the Yunnan earthquake. UBS eventually conducted a telephone interview with the relevant customer.

    The SFC found that UBS called the relevant customers on the telephone number provided by China Forest and did not conduct any background checks on the customers to verify their telephone numbers and/or the identity of the respondents. The SFC also found that the record of interviews was seriously inadequate.

    The SFC also found that the lack of UBS's application for listing in China's forests can be attributed to the negligence of the main personnel of the sponsors in fulfilling their supervisory responsibilities.

    Missing sponsors in the Tianhe listing application

    According to a survey conducted by the SFC, UBS, as one of the co-sponsors of the TRW listing application, did not comply with the specific guidelines for due diligence interviews in paragraph 17.6 of the Code of Conduct.

    (i) Trina Intervention Due Diligence Interview

    UBS interviewed ten Tianhe customers: six of them were interviewed face-to-face by telephone or at the Jinzhou office in Tianhe, China, while the remaining clients were interviewed in their own premises.

    UBS did not contact the relevant customers directly regarding the mode and location of the interview or confirmation interview. Instead, the lead is Tianhe, which informs UBS which customers are not able to attend face-to-face interviews, and which customers refuse to conduct interviews in their business premises. There is no evidence that UBS has taken any steps to ask the relevant customers why they did not agree to be interviewed at their offices.

    (ii) did not address the warning signs that appeared in the interview

    UBS initially requested an interview with Tianhe's largest customer (Customer X) at its office, but Tianhe said that as a client of large state-owned enterprises, X is generally rejecting any third party due to anti-corruption actions in mainland China. Visiting the requirements of his premises, and UBS finally accepted this explanation.

    UBS and later agreed to interview Customer X at Tianhe Office. At the end of the interview, the representative of Customer X refused to show his ID card and business card and rushed out of the meeting room. He told UBS that he would not agree to the interview under the customer X's internal procedures, and that he was only attending the family to assist the CEO of Trina.

    However, UBS did not conduct any follow-up enquiries to confirm that the person interviewed by the interviewer was a representative of Customer X and that he had the appropriate authority and knowledge to accept the interview.

    (iii) The interview question is ambiguous

    Based on the sales documents provided by UBS, Tianhe conducts business with its customers through its subsidiary Jinzhou Huifa Tianhe Chemical Co., Ltd. (Jinzhou Huifa Tianhe).

    In customer interviews, UBS asked respondents about business transactions between their company and Tianhe Group (not Jinzhou Huifa Tianhe). Although the respondents were also asked "what company is mainly related to the members and business units of the Tianhe Group", only three of the ten customers interviewed confirmed that they had a relationship with Jinzhou Huifa Tianhe. contact. However, UBS did not follow up with the remaining customers who are dealing with which member of the "Tianhe Group".

    Among the top ten customers claimed by Tianhe, one of the clients who had accepted UBS interviews indicated to the CSRC that when their representatives answered questions about the transaction between the customer and Tianhe Group in the interview, their representatives pointed out It is traded with Liaoning Tianhe Fine Chemicals Co., Ltd.; Liaoning Tianhe Fine Chemicals Co., Ltd. is a privately owned company owned by Tianhe CEO's family, but it is no longer part of the Tianhe Group to be listed at key times.

    Since the listed and unlisted chemical businesses owned by the CEO of Tianhe CEO are referred to as “Tianhe”, the SFC believes that UBS referred to “Tianhe Group” and/or did not request to be interviewed when interviewing customers. The exact identification of which TC member company is transacting with its affiliated organization is insufficient.

    When the SFC decides the above disciplinary action, it has taken into account:

    UBS sponsors are missing three listing applications including China Forest and Trina;

    The deficiencies identified in relation to UBS are wide-ranging: UBS does not properly review and verify major aspects of China's forestry business, namely its forestry assets, logging activities, coverage and customers; and UBS allows Trina to control due diligence procedures And did not take appropriate steps to address the early warning signs in customer interviews. In addition, the above-mentioned violations and deficiencies are related to the due diligence of Tianhe's major customers (including its largest customers) during the Track Record Period;

    The sponsor has a considerable degree of control over the listing process. If the sponsor's due diligence work fails to meet the standards and the companies that are not suitable for listing still obtain listing status and eventually close down, they may cause huge losses to public investors and their confidence in Hong Kong's financial market. Therefore, there must be a deterrent penalty for the absence of the sponsor;

    UBS and the Department of Health have cooperated with the SFC's disciplinary actions, investigation findings and regulatory concerns; and UBS has agreed to engage an independent review body to review the policies, procedures and practices relating to its sponsor business.

    Mr. Ashley Alder, chief executive of the Securities and Futures Commission, said: “These enforcement actions are aimed at the lack of sponsors, especially the sponsor’s lack of due diligence in the IPO. The results of the enforcement actions show that the SFC Highly value the sponsor's high standards of conduct, as this will protect the investors and maintain the integrity, reputation and reputation of the Hong Kong financial market. The relevant enforcement actions convey a strong and clear message to the market that we will not hesitate to recommend the dereliction of duty. The misconduct committed by people is held accountable."

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